The Excise Tax on “Cadillac” Policies: Two Views

However much I respect wonkiness, I lack the math skills to be a wonk myself. Especially when numbers (including money) are involved, I must trust the wonks to know what they’re talking about. I can’t present arguments of my own beyond “what Bob the Wonk said.” So, when I run into opposing arguments from people I respect that involve numbers I don’t always know who’s right.

In yesterday’s Washington Post, an MIT economics professor named Jonathan Gruber presented an enthusiastic endorsement of the excise tax on “Cadillac’ health insurance policies. Gruber calls it “an innovative way of financing the health reform we so desperately need.” On the other hand, in today’s New York Times, Bob Herbert says the tax “will hammer millions of middle-class policyholders, forcing them to scale back their access to medical care.”

So who’s right? Hell if I know. Maybe they both are — the excise tax is a means of financing health reform that will impact many middle-class policyholders. Or not. Hard to say. Note that Ezra Klein is less enthusiastic about the tax than Mr. Gruber but less alarmed than Mr. Herbert. Exactly how the tax would impact individuals depends on a lot of other factors, apparently.

A “Cadillac” policy according to the Senate bill is a policy whose costs exceed $23,000 annually for family coverage and $8,500 for individuals. The excise tax would be a tax paid by the insurance companies on the amounts over those thresholds. In other words, if a family policy costs $24,000 a year, the tax would be levied on $1,000. This tax would impact all qualifying policies; the income of the policy holder is irrelevant.

However, no one seems to know exactly how many of these “Cadillac” policy holders are out there. The average costs of family and individual policies are lower. For example, the average cost of an employee-benefit family policy in 2009 is $13,375, according to the Kaiser Family Foundation. So who would be impacted? Right now, I don’t know. If health care costs continue to rise as fast as they have in recent years, eventually it would suck in just about everybody, however.

Non-group individual HMO policies, by which I mean policies that are not in a group plan, here in New York are a lot more expensive than $8,500 a year, and I assume the excise tax would apply to those also. One of the frustrations of trying to purchase individual plans here is that the companies don’t give you choices — here’s our HMO plan at $900/month, take it or leave it. A plan with lower premiums but, say, higher co-pays might be welcomed by some people, and the excise tax would force Empire Blue Cross to come up with such a policy.

But, ultimately, the success or failure of the entire health reform process depends on getting costs under control. Various provisions in the bills — such as the dreaded mandates — are there to reduce cost, and if they work the “Cadillac” plan provision possibly won’t be that big a deal to that many people. If they don’t, then yeah, I can see how the excise tax could result in a bite.

For that reason, it seems to me to be a bit deceptive to take one part of the reform plan and examine it outside the context of the rest of the plan. Bob Herbert’s arguments are compelling, but they seem to assume that nothing else about our health care “system” will change. For that reason, I’m not sure he’s right. Maybe he is, but not necessarily.

According David Leonhardt at the Times, a study by the Center on Budget and Policy Priorities, “a liberal research group,” endorsed the plan and said liberals should like it. Another endorsement from the wonks. On the other hand, Dartmouth economics professor Andrew Samwick says,

I am not a fan of the excise tax on so-called “Cadillac” health plans. I would need to be convinced that the reason why the premiums are so high is unrelated to the health characteristics of the insured group. What if the premiums are so high because the insured group is old or has large families? Simply including all plans in the ex post risk adjustment and reinsurance aspects of the bill is the right way to even out premium costs in the face of differences in the insured group. And if people want to spend more on their own health insurance, through high-quality services or (to my thinking) inefficiently low deductibles and co-pays, why stop them?

Well, as I said above, in some situations the insurance companies aren’t providing a lower-quality, lower-cost choice. But the larger point is that on this bit of the Senate bill, reasonable people disagree.

Update: Ezra Klein responds to Bob Herbert.

18 thoughts on “The Excise Tax on “Cadillac” Policies: Two Views

  1. I think the weakness of Herbert’s column is in that it doesn’t really keep an open mind. It starts off dismissive of the idea, and proceeds accordingly. And instead of interviewing health economists or labor economists, you get an interview with the president of the AFL-CIO and a survey that claims not many employers would convert less compensation in benefits into wages. But as you said, that sort of ignores context, namely the effect on the market that even 1 in 5 or so firms increasing wages will have on everyone else, especially since we’re mostly talking about middle-to-upper middle class workers.

  2. Also, the logic strikes me as pretty odd. For one, the tax would be imposed on insurers, not employees, or even employers. The idea then is that insurers will get less out of people buying too much coverage. It isn’t ideal, but it isn’t ideal precisely because it’s hiding the cost from the consumer. After all, insurers won’t get as much money, but even at a 40% tax rate, they’ll still keep $0.60 on every dollar of policy above the threshold they sell, which is better than nothing.

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  4. You may not remember, but at one time, we had something called a “Journalist,” who used to seperate the wheat from the chaff.
    Now, the chaff pays the ‘journalist,’ or their paper (via ads), and we awaken to discover that the chaff is worth more than the wheat. Who knew?
    Simple rule of thumb: If your health care system is so complicated that a 7th grader can’t understand it, it’s WAAAAAAAAAAAAAY too complicated. I don’t mean to insult 7th graders, but when most American’s would fail that show about what 5th grader’s should know, we’re in trouble. And, sadly, I’m one of them…
    And I don’t think I’m that badly informed. But, what do I know?

  5. Brien — I think it is probably the case that the insurers will pass the cost on to the consumer somehow, probably by raising co-pays, and that could be burdensome to some people. It’s also true that there’s no painless way to put this reform through, and that over time we’ll probably find lots of holes and cracks that need further patching.

  6. I thnk Ezra has the best rejoinder:–_an.html

    The bottom line, it seems, is that any form of cost control is going to involve someone “losing,” and as such there will be someone who thinks it’s a terrible idea. That’s why cost control is so difficult. But a world where we don’t get healthcare costs under control is a world where the United States goes bankrupt on a national scale. And then we all lose. And I think Ezra is right to point out both that there’s no evidence that more pressure against overuse produces any worse health outcomes, and to point out that there is a good bit of overuse in the system. Just because there are 40 million or so uninsured people doesnt mean there aren’t other people elsewhere using much more healthcare than they need.

  7. Andrew Samwick says ‘And if people want to spend more on their own health insurance, through high-quality services or (to my thinking) inefficiently low deductibles and co-pays, why stop them?”
    Adding a tax to a luxury plan doesn’t stop people from buying it. The tax just makes people who can afford these plans pay a little extra for people who can pay for nothing. Seems fair to me, but then I am a socialist at heart, so what do I know.

  8. I wonder what other potential time bombs are in the healthcare reform legislation? It’s 2000 pages long. Can a human even read it? Tolstoy’s “War and Peace” is only 1296 pages.

    Taxing Cadillac Plans – I don’t know, like Maha, I’m not enough of a wonk to say if this is good or bad. Maha is absolutely right that controlling costs is crucial to make any healthcare plan work – and that’s doubly true if you’re going to have mandates.

    Maybe we can finance real healthcare reform by taxing corporate campaign contributions.

  9. Pingback: Taxing “Cadillac” Plans: Three Progressive Views | The Moderate Voice

  10. Andrew Samwick says ‘And if people want to spend more on their own health insurance, through high-quality services or (to my thinking) inefficiently low deductibles and co-pays, why stop them?”


    Meanwhile, “Health care reform” does the exact opposite- It will make the choices of a person like me (I’m OK with average service, a 15-20 yr old level of innovation, $10K/yr deductibles and no mandatory payments for annual colonoscopes that I will never show up for…) illegal.

    Why stop me?

  11. I found Gruber to be more convincing that Herbert. For one thing, Gruber convinced me that the ‘Cadillac Plan’ attempts to bend the cost curve and should accomplish that to some degree. I was leaning the other way (tax the high income earner) until Herbert explained the underlying theory.

    Herbert seemed to be searching for excuses that might sway the reader, but I neve felt he was honest about why he opposed the Caddilac Plan. Before I read both articles, I was leaning the direction of Herbert.

    Congress will try to split the difference, so we will see the House and Senate ideas to some degree in the final bill. I’d be delighted if they could formulate a method that would try the ‘Cadillac Plan’ first, with a shift to taxing the high-end earner if they need to make up revenue or if the’Cadillac Plan’ isn’t meeting benchmarks.

    I understand Newt is ‘running’ on a platform of repeal the bill, so it’s starting to feel like it will be passed. My guess is that he will sign with 2 pens – one a gift for Ted Kennedy’s family, and one for the SecState. When I see Obama hand off the pens, then I will start breathing again.

  12. Fletch, you have a $10,000/yr deductible and you’re OK with that?

    And you’re OK with the risk of colon cancer?

    Wow, PT Barnum was right I guess… one born every minute.

    • Wow, PT Barnum was right I guess… one born every minute.

      joan — It’s a patriot’s duty to support the financial sector by purchasing junk health insurance policies. Demanding that insurance actually, you know, insures people is socialism.

  13. What bothers me most about discussion of high cost plans is that, at my gut level, it sounds like they think “health care costs” are primarily demand driven, and we should reduce demand as a way of containing costs.

    Now, I’m sure there are demand driven places. I have a slightly sore shoulder, and a slightly twinge-y hip, and because I have a good health insurance policy, I want physical therapy – I want to have someone, at little cost to me, teach me to move and exercise so as to heal my shoulder and hip. If I didn’t have a good policy, if I had to pay (guesstimate) $60 a session, I might go to a physical therapist once or twice, rather than the probably-up-to-8-times.

    *BUT MY SHOULDER HURTS AND MY HIP TWINGES*. And learning exercises and learning good practices are a perfectly appropriate treatment for this. I wouldn’t waste time going to a physical therapist if I didn’t have a real issue that needed addressing.

    And I don’t think most other people would as well.

    I’m sure there are demand driven issues. We might be a bit imaging happy (“OOH! I can get a *CAT* scan instead of just a normal X-ray!”) which can drive up costs, and drug advertisements undoubtedly get people asking for drugs that are more expensive than other drugs that work just as well. But I think the issue there is to have ethical doctors who are unhurried enough to explain why an X-ray is better than a cat scan (“it’s ionizing radiation, and if it’s necessary, it’s worth it, but we’d rather hit you with this smaller dose, since we’ll get the same information”) or why a simple diuretic-style antihypertensive might be just as effective, with fewer side effects, than the latest and greatest whatever-the-heck.

    Drug prices especially. Drug prices are set by analogy. “If taken by people who’ve had one heart attack, this reduces chances of a subsequent heart attack by 50% over the next 5 years; a second heart attack would cost $60,000, so, $12,000 a year, so this drug saves $6,000 a year. We can charge $3,000 for a year’s supply and we’re actually saving money!”

    Then, they show that it reduces the risk of a first heart attack by 20%, and get doctors to prescribe it for more people, at the same price – and it’s now *more* expensive than what it’s preventing (5 people must take it to prevent one heart attack, versus 2 in the previous example – so $15k/year to prevent an annualized risk of $12k a year).

    A doctor can, and should, have the information to say that the drug isn’t cost effective. Of course, the drug company will immediately start talking about “rationing” and “death panels”. (Or, reward those who do, naturally. Drug companies would prefer not to have to directly shill for their profits; it makes them look bad.)

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